The Waqf Fund organized its 9th Corporate Governance workshop in Bahrain to discuss culture, compensation design and conduct risk. 27 people including Chairmen, Board members and CEOs of Waqf Fund member institutions attended the workshop.
Dr. Nabil El-Hage, an expert on corporate governance and a former professor of Harvard Business School, led the workshop. He presented three cases during the sessions, including the cases of two global banks and a global retailer which has recently filed for bankruptcy. The key lessons learned from these case studies are mentioned below:
- Key Performance Indicators (KPIs) are a result of the strategic planning exercise. KPIs should always map to strategic objectives of the company.
- It is best to keep the KPIs simple, to the extent possible.
- A person should be held accountable only for factors that are within his/her control. If the cause and effect relationship is not well established it is counterproductive to include the factor in their KPIs.
- To choose the right KPIs three criteria must be kept in mind:
- Alignment with strategy
- Linkage to value
- Three common problems while designing performance measurement systems are:
- Alignment (of all stakeholders’ interests)
- Interdependency (team performance vs. an individual’s contribution)
- Compliance with legal and regulatory requirements is a pre-requisite and cannot be compromised, no matter how good the financial performance may be.
- Reputational damage as a consequence of misconduct is far more serious than financial loss (e.g. due to penalties and fines). It does not make good business sense for companies to take this risk.
- Non-financial considerations relating to conduct should be integrated in a balanced way to performance assessment and compensation.
- Compensation policies and procedures should be transparent, consistent and fair in order to promote clear expectations and accountability for conduct.
10. The consequences of misconduct risk may take years to materialize; companies should structure the compensation incentives to account for this long timeframe (e.g. through clawback).
11. Sound governance, robust risk management frameworks and adequate involvement by control functions including human resources in compensation design and decision-making are critical to the effectiveness of compensation incentives in addressing misconduct risk.
12. The ultimate responsibility for ensuring accountability for misconduct lies with the Board of directors. The Board should oversee and senior management should implement a compensation system designed to promote ethical behavior.
13. Make it explicit to the employees what values / behavior / culture you expect of them.
14. How leaders shape behavior?
The Waqf Fund, which hosted the workshop, has been serving the Islamic finance industry in Bahrain since 2006. It offers several programs targeted to Islamic finance practitioners, Shari’ah resources and other stakeholders. The Waqf Fund has 22 member institutions including the Central Bank of Bahrain.